7 The Farm Credit System: Another Source of Loanable Funds Donald E. Wilkinson Those of us involved in financing agriculture have come through a decade of major changes in the agricultural sector that have chal- ?lengedmany of our traditional business systems. The use of farm debt rose from $53.0 billion in 1970 to $157.3 billion in 1980. Costs of agricultural inputs increased nearly threefold or 168.9 per cent. The number of farmers had decreased from 4.5 million just 10 years ago to 2.4 million in 1979. As a result, we now have fewer, larger farms providing for the needs of our own population plus a sizeable portion of the world population. Periods of double-digit inflation, energy costs that have quadrupled in the past six years, and market prices for commodities that fall below the cost of production are just a few of the elements that have caused the significant increase in demand for agricultural credit. At the same time, and in particular during the past year, agricul- tural banking has gone through some changes. I am referring, of course, to the Depository Institutions Deregulation and Monetary Control Act of 1980-the omnibus banking act. It will affect the ways in which all banks and other financial institutions, such as thrift institutions and credit unions, operate - and, in particular, rural banks. We expect it will have an effect on how the Farm Credit System operates, too. I say this because the omnibus banking bill will affect the entire financial community of which the Farm Credit System is a part. In effect, we-all of us-are entering a new era. Just as the agricultural and commercial banking sector is changing to meet changing credit demands, the Farm Credit System is adjust- ing to the changing needs of its primary borrowers-the farmers, ranchers, and aquatic producers of this country - through amend- ments to the Farm Credit Act of 197 1. The 1971 Act was an omnibus 140 Donald E. Wilkinson act which mandated the system's institutions to assure that necessary credit could be obtained to improve the income and well-being of American farmers and ranchers. The 1980 amendments deal with the growing needs for agricultural credit in the 1980s arising out of the changing environment. The centerpiece of this legislation is the authority to finance cooperative exports. But my assignment in this paper is to examine how the Farm Credit System may provide loanable funds to agricultural banks. As all of your are aware, a portion of the Farm Credit Act Amendments of 1980 deals specifically with this subject. However, before I enter into the discussion of other financial institutions and participation agreements, I would like to set the stage with a brief review of the Farm Credit System's history and how it is organized and funded. a The Cooperative Farm Credit System The cooperative Farm Credit System operates under authority contained in the Farm Credit Act of 197 1, P.L. 92- 181, as amended. It is a system of federally chartered but privately owned banks and associations organized as cooperatives, supervised and examined by the Farm Credit Administration (FCA), an independent agency in the executive branch of the U.S. government. Although originally capitalized by the Federal government, the last of the government's investment was repaid with interest in 1969. The Farm Credit System is now completely self-sustaining. Its banks and associations have no government capital in them. Capital is obtained through the purchase of stock by their borrowers. Farm Credit securi- ties or other obligations are not guaranteed by the government. The expenses of the Farm Credit Administration are paid through assess- ments to the banks, comparable to the Comptroller of the Currency's arrangements with its federally chartered banks. It is the System's borrowers and not the taxpayers who pay the expenses of the Farm Credit Administration. The system is very proud of this and feels that it is a good example of government partnership with a segment of its people - in this case, farmers - to obtain a needed service. The triumvirate that forms the Farm Credit System today-the 12 Federal Land Banks (FLB's) and the 492 Federal Land Bank Associ- ations (FLBA's), the 12 Federal Intermediate Credit Banks and the 424 Production Credit Associations (PCA's), and the 13 Banks for Cooperatives (BC's)-are all borrower-owned cooperatives. These The Farm Credit System: Another Source of Loanable Funds 141 financial cooperatives differ from commercial banks in several ways. First and foremost, they are owned by the people-or, as in the case of the Banks for Cooperatives, by the cooperative organizations - who borrow from them. Each member-borrower has a voice through his or her vote in how the cooperative is operated. Secondly, Farm Credit banks and associations are not depository institutions and cannot offer a full range of services such as checking or savings accounts. Another unique characteristic is that Farm Credit institu- tions are required by law to serve all agricultural areas during all economic times and conditions. In other words, they have to serve farmers, ranchers, producers and harvesters of aquatic products, agricultural and aquatic cooperatives, rural homeowners, and certain businesses which provide farmers and ranchers with services essen- tial to their on-farm operating needs, no matter what the general credit or economic climate is. Futhermore, they cannot be selective. They must serve all who are eligible and creditworthy. Another characteristic of the Farm Credit entities that sets them apart from commercial banks is that they operate under eligibility restrictions to ensure their status as agricultural lenders. For example, they cannot make a loan to someone who wants to build a shopping center or a housing development. They are committed to making loans for agricultural production and other eligible purposes. And finally, I'd like to emphasize that farmers are their primary business. Even the cooperatives to which they make loans are not business entitites in the traditional sense. Cooperatives exist only as an extension of individual farmers operating as a group. About five years ago, the Farm Credit System became the leader in market share of total farm debt outstanding (see Table 1). Before that, commercial banks were the leading holders of outstanding farm debt. As of January 1, 1980, the System held 30.9 per cent of the total farm debt outstanding, compared to 25.2 per cent for commercial banks, 23.4 per cent for individuals and others, 9.9 per cent for the Farmers Home Administration, 7.7 per cent for life insurance companies, and 2.9 per cent for the Commodity Credit Corporation. The statistics show, however, that the Farm Credit System is the leading holder of total outstanding farm debt because of the shift in share of farm real estate debt. About five years ago, insurance companies began to retreat from the farm mortgage lending market (see Table 2). Commercial banks' share of farm mortgage lending has ramained relatively constant during that time. In outstanding non-real TABLE 1 Outstanding Farm Debt, January I, 1980' (Amounts in Millions of Dollars) Includes CCC Loans Farm Credit Commerciul Life Ins. Individuals CCC Grand System % Banks % Companies % FmHA % And Others % Total % Loans % Total 1970 $11,384 21.5 $13,875 26.2 $ 5,734 $2,676 5.0 $53,027 1971 12,660 23.2 14,874 27.3 5,610 1,876 3.4 54,483 1972 14,195 240 16,716 28.3 5,564 2,262 3.8 59,113 1973 15,908 24.3 19,107 29.2 5,643 1,793 2.7 65,344 1974 19,061 25.7 22,625 30.5 5,965 750 1.0 74,136 1975 23,295 28 5 24,204 29.6 6,297 319 0.4 8 1,832 1976 27,073 29.8 26,456 29.1 6,726 358 0.4 90,832 1977 31,056 30.3 30,064 29.3 7,400 1,012 1.0 102,663 1978 35,273 29.6 33,489 28.1 8,819 4,489 3.8 119,272 1979 40,171 29.2 36,830 26.8 10,168 5,242 3.8 137,499 1980 48,631 30.9 39,657 25.2 12,165 4,500 2.9 157,348 '50-state total. TABLE 2 Farm Real Estate Debt Outstanding' January 1, 1980 (Amounts in Millions of Dollars) Federal Life Farmers Total Farm Year Land Insurance Commercial Home Individuals Real Estate Banks % Companies % Banks % Admin. % And Others % Debt % 6,671 7,145 7,880 9,050 10,901 1 3,402 15,950 18,455 21,391 24,619 29,642 totals. 144 Donald E. Wilkinson estate farm debt, commercial banks have maintained their market share and are by far the leading short-term lenders, providing 41 per cent, with PCA's a distant second with 24 per cent (see Table 3). A recent study by the Farm Credit Administration projected that market shares of farm debt will continue to shift during the 1980s and that the Farm Credit System's share could gradually increase. The level of increase, however, will depend on several factors, including funding costs, the difference between the System's variable rates and interest rates charged by other lenders, and the availability of funds from other lenders, including government. We expect to see consid- erable innovation in bank lending to meet the general challenge of the farming environment of the 1980s, and the specific challenge of the Depository Institutions Deregulation and Monetary Control Act of 1980.